Profit on cancellation of own debentures is transferred to which of the following?

Capital Reserve

The correct answer is option 1- Capital Reserve.

Profit on cancellation of own debentures is transferred to Capital Reserve.

When a company purchases its own debentures in the open market for the purpose of immediate cancellation, the purchase and cancellation of such debentures are termed as redemption by purchase in the open market. The advantage of such an option is that a company can redeem the debentures at its convenience whenever it has surplus funds. Secondly, the company can purchase them when they are available in market at a discount. When the debentures are purchased from the market at a discount and cancelled, the journal entries are recorded as follows:

1. On purchase of own debentures for immediate cancellation:
Debentures A/c Dr.
      To Bank A/c
      To Profit on Redemption of Debentures A/c

2. On transfer of Profit on Redemption:
Profit on Redemption of Debenture A/c Dr.
            To Capital Reserve